Surely, you or one of your clients have been in this situation: You unexpectedly find a property that you think is perfect. It is one of a kind, and you really want it. But there is no way you can buy that property unless you sell your current property first. Furthermore, there is no way the seller is going to wait for you to sell your current property. You have a limited amount of time to make this deal work. What options do you have?
The way to get the job done is to first, secure the money for the down payment. Second, you get a loan for the rest. That gives you time to sell your current property without risking losing the opportunity to buy your dream house.
Let us talk about the first step, the down payment. If you do not have the money for the down payment, you can take a second mortgage on your current property. We all have heard of traditional equity lines of credit. Typically, it takes at least 30 days to get one. Currently, banks do not even issue them. Also, when they are available, many, especially business owners and self-employed people, do not qualify.
Another option is to get a hard money loan for the down payment of the new house. It is fast to get and easy to qualify for when you have enough equity in your current property. Therefore, with the hard money option, getting the down payment for that unexpectedly found dream home is easy.
In step two, you get a conventional loan or a hard money loan to finance the rest of the purchase price of the new property.
This gives you enough time for step 3, during which you can sell your current property. With the proceeds you can pay down both loans. Step 1 and 2 also give you enough time to refinance with conventional loans when you qualify for them.
Here are two real-world examples for how to eliminate contingencies fast:
A couple owned a property worth a million dollars. They owed 375,000 on it. They wanted to purchase another property priced at $1.2 Million. They did not want to lose the opportunity to buy this dream home. As is often the case, the seller was not willing to wait for them to sell their current property.
Step 1: Down payment with hard money based on the equity in the current home
The owners had 300,000 of their own money. Based on the equity in their current property, RanchoTed lent them 200,000 for the new purchase. Combined, they now had 500,000 as a down payment for the $1.2 million purchase.
Step 2: Financing the rest with hard money based on the equity in the new home
RanchoTed gave them the remaining $700,000 through a second hard money loan based on the value of the new property they were purchasing.
Step 3: Selling their current property and refinancing
When they sell the current property, they can pay down and refinance the loans, probably with a small conventional loan.
Both hard money loans we gave them are situational loans. A great opportunity comes up, and you must act fast to take advantage of it. You can get it done fast without jumping through the lengthy and time-intensive hoops typically encountered with a bank. By the time, that is done (if you even qualify) the dream house is sold to someone else.
Hard money provides a great alternative and can step in and get the job done. In situations like these, there is often no other way to get it done.
Here is another example:
A client owned a condo in San Diego free and clear. It was worth $1.2 Million. The owner wanted to buy a different condo in San Diego, also worth $1.2M.
RanchoTed gave the client a $600 k loan on the current property which she used as a down payment for the new condo. Such a loan is simple and straight forward.
The remaining $600k was borrowed as well with the new property as collateral, putting the total loan amount at $1.2 M.
Hard money was therefore a great way to eliminate the contingency to buy the second property. This example also shows how it is possible to buy a second property with no money required out of the borrower’s pocket, i.e., 100% financing.
The only aspect to be careful of in a situation like this is to make sure the first property is sold quickly enough to avoid the pain of having to service a large loan for too long. These loans are intended to serve as a bridge loan.
In conclusion, hard money is a great tool for eliminating contingencies, especially, when an opportunity to buy a great deal or a dream home arises unexpectedly.